How to Lose a Trade War

The Trump administration's imposition of so-called safeguard tariffs on imports of solar panels and washing machines is directed mainly at China and South Korea. But, while neither country is responsible for America's large trade deficit, further protectionist measures seem certain – and will leave US consumers worse off.

NEW HAVEN – Protectionist from the start, US President Donald Trump’s administration has now moved from rhetoric to action in its avowed campaign to defend US workers from what Trump calls the “carnage” of “terrible trade deals.” Unfortunately, this approach is backward-looking at best. At worst, it could very well spark retaliatory measures that will only exacerbate the plight of beleaguered middle-class American consumers. This is exactly how trade wars begin.

China is clearly the target. The January 23 imposition of so-called safeguard tariffs on imports of solar panels and washing machines under Section 201 of the US Trade Act of 1974 is directed mainly at China and South Korea. Significantly, the move could be the opening salvo in a series of measures.

Last August, the US Trade Representative launched Section 301 investigations against China in three broad areas: intellectual property rights, innovation, and technology development. This is likely to lead to follow-up sanctions. Moreover, a so-called Section 232 investigation into the national security threat posed by unfair steel imports also takes dead aim at China as the world’s largest steel producer.

Stephen S. Roach, former Chairman of Morgan Stanley Asia and the firm's chief economist, is a senior fellow at Yale University's Jackson Institute of Global Affairs and a senior lecturer at Yale's School of Management. He is the author of Unbalanced: The Codependency of America and China.

The foreign policy community has waken up. The economics community is still sleeping. China's totalitarian rise is a real threat to western democratic and free values. The window to contain China is narrowing rapidly.

"Revealingly, the only major exception to America’s protectionist consensus was the antebellum South, because free trade is the ideal policy for a nations that actually wants to be an agricultural slave state. An economy founded on slave-based agriculture has no hope of achieving competitive advantage in anything else, as slaves have proven unsuitable for industrialization since the time of Ancient Rome. Because the tariff was the main source of federal revenue in those pre-income tax days, the South also bore a disproportionate share of the nation’s tax burden. No wonder it was in favor of free trade—which the Confederate constitution eventually mandated."

"With trade tensions now mounting, hopes of a breakthrough on a US-China investment treaty have been all but dashed."

Reveals all too much about elite priorities. The U.S. has no compelling interest in facilitating U.S. corporate investment in China (quite to the contrary). The U.S. does have a compelling interest in in promoting U.S. exports to China and the world. Note that the sentence specifically mentions investments, not exports.

Some number of years ago, an American politician made the following absurd campaign promise.

"Give us a protective tariff, and we will have the greatest nation on earth"

That politician was Abraham Lincoln and unlike virtually every other politician, his campaign promise came true.

America was literally founded on protectionism and successfully built a great nation behind high tariff barriers through out its history. Of course, America has always been afflicted by "free traders" as well. Before that Civil War, slave owners were notorious advocates of "free trade". Now we have corporate types (and cosmopolitans) who want to outsource the U.S. economy for personal gain.

Some things never change.

By the way, the idea that "Smoot-Hawley caused the Great Depression" is another myth that will never die. American was already deeply protectionist before Smoot-Hawley (see the Fordney–McCumber tariff of 1922). Beyond that, Ben Bernanke devoted his career to studying the Great Depression and writing about it. Tariffs barely show up in his work.

I will just guess that Stephen S. Roach isn't too familiar with the literature on the economic effects of the Smoot-Hawley Tariff Act of 1930. Economists from Milton Friedman over Peter Temin to William Bernstein nowadays all agree that the Smoot-Hawley Act had no significant effect on the Great Depression, as its negative effect on trade was largely compensated by a positive effect on domestic demand.

Same old, same old. The US and Germany in the 19th century, and Japan, South Korea, Taiwan and China since the end of WWII, have industrialized and grown due to a combination of tariff protection and export promotion. A few episodes of currency manipulation also have helped the process for the more recent winners. Moreover, as overall tariffs are very low at present, any expansion of trade will create distributional effects that are a multiple of several factors greater than the very small contribution expanded trade makes to overall GDP.

If Roach were honest, he would indicate the he and those whose positions he supports are the distributional winners of the trade game. The losers are those who are poor, less educated and in excess supply in the labour markets, in part because cheap workers have have been imported together with cheap goods produced at labour costs that would be illegal in the richer countries. It is in services, financial services in particular, where reside those who have been great beneficiaries from the liberalization of capital markets, which is why the WTO - the TRADE organization - demands capital market openness for membership. It is not surprising as well, that the divergence in executive pay at large multinational corporations from the average wage paid in these firms has accelerated at the same time that trade relations have become much freer.

Yeah thats about it. Labour is claimed often to be a valued resource but not really because it is sold down the river as suits. These corporations would not exist if it was not for the workers who they laid off when offshoring. Capital is free and easy to move but labour is not, it is largely anchored in one location. It follows is you are close to capital you are not affected by its movement, but if you are labour you can be left flapping like a fish on a dry riverbed. Hence Trump in the US, Brexit in the UK and similar brewing elsewhere

So your solution is tariff's to increase the pain of labor? Not too well thought out. How about increasing the mobility of labor? But that means increasing free movement of actual human beings, aka immigration, which I will bet since you like Brexit, you are against.

"Lacking in domestic saving and wanting to consume and grow, America must import surplus saving from abroad and run massive current-account and trade deficits to attract the foreign capital."

This has it completely backwards. Much of the debate over Trump's trade policy seems to miss the point that the economic effects of any trade measure depend on how it affects capital. This is because policy makers assume that capital flows simply respond to changes in trade. Although this was true for most of modern history, it no longer is -- and hasn't been for more than five decades.

What's important to recognize is that the deep trade imbalances afflicting the U.S. in recent years mainly reflect the impunity with which other countries exploit access to its capital account. Capital markets in the U.S. are deep, flexible and completely open, making it easy for countries that aim to run trade surpluses to park their excess savings there.

As a result, the U.S. is forced to absorb roughly half the world's excess savings. Even though American businesses are sated with cheap capital, and sit on hoards of unused cash, money is still pouring into the U.S. and forcing its capital account into surplus. It thus has no choice but to run a trade deficit.

In effect, the U.S. is no longer in control of its own economy.

Rather than intervene directly, only to undermine global trade and worsen these imbalances, Washington must address the role the U.S. plays in absorbing global capital. This is the only way to resolve American trade deficits.

A huge danger exists when we promote currencies to play an even larger role in trade wars. The dollars recent tumble has moved far past where many of us predicted, of course, much of this has to do with President Trumps rather unorthodox take on "Making America Great Again."

This was spurred on when U.S. Treasury Secretary Steven Mnuchin told reporters at the World Economic Forum in Davos that he endorsed the dollar’s decline as a benefit to the U.S. economy."

We cannot, of course, underestimate the important role currency valuations play in the global economy. The article below cautions about the danger of promoting currencies role in managing trade.

Mr. Donald J. Trump has been described by reputed observers as one who never read books on history, engineering topics or about culture of ' other' people's! That is a serious flaw in his mindset!

It is just common knowledge . There are tens of thousands of parts and products that are needed in supply chain and can be and are produced in poorer and less developed countries at one tenth of US production cost.

There is so much noise nowadays by economists, and political pundits that there is an invasion of automatoons which would give upper hand to USA and Europe et. It is a delusion. Technology proliferates along with knowledge of labour saving automatic jigs, fixtures and IT controlled machines everywhere ! It further gets improvised to suit local conditions and talents!

Once a former prime minister of India- ManMohan Singh, said,"Trade and commerce" is a two-way street. You can't stop them" US will be a looser if it imposes protectionism.

Most nations that Trade with US avoid (our shrinking) technology advantages. 20 years ago you could only buy high quality jet planes from the West. They were careful to transfer the design and production processes to their nations and import-substitute like crazy. They paid more in the short-term, but got an increase in jobs and income over the longer term. Supply Chains are mobile, the US can easily migrate them to US soil and use capital to match lower foreign labor costs. Trade policy should be designed to first benefit US citizens. The key is not the immediate cost of consumer goods, but the know-how to contruct ever-more effective production processes.

If you offshore tech you destroy the support network which is a multiple of the jobs offshored and in turn stop knowhow. This is okay if you think you no longer want to to make the stuff in question. Its dodgy otherwise. You need a large activity to support R&D, without R&D you end up in labour cost arbitrage. As you point out the knowhow gap is shrinking. Some of this offshored technology is substantially based on US public funded research and wouldn't exist otherwise but it is corporations offshoring for short term profit. Aerospace, pharma, smartphone tech etc.

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